Sunday, November 08, 2009

So I shorted the market. In fact, I double shorted it (DXD). I just can't believe that investors think we have recovered. Real unemployment/underemployment is nearing 20%, the worst levels since the Great Depression. Yet the economy grew at a 3.5% rate. Really? Ok so there was the stimulus package and even GM was up with cash for clunkers. But that really is just borrowing to pump up the numbers, and even that isn't helping employment.

Next year you have more ARMs than ever graduating to terrorist rates when the earning potential of mortgage owners is lower than ever. It's hard to imagine that the next wave of the housing crisis isn't just around the corner. So we are subsidizing home owners, renegotiating rates at a loss at government agencies and eating the losses at Mae family of institutions. We are borrowing to pump up the numbers.

And then we are printing money. Lots of it. Tanking the dollar, creating inflation which at the same time devalues our debt. We are borrowing to deflate our debts. But our debtors are none too happy with that.

In real terms, have we really seen an increase in the market? Seems like the market has performing at the exact inverse of the dollar. How much more can we borrow before everyone sees it's all a sham?

But there is also another side to the story, as my friend Simon points out. A market isn't necessarily built on fundamental values. The dollar is a fiat currency not tied to the value of gold. Profits can be manipulated. Future outlook is speculative. And at the end of the day, it's a virtual market with a certain supply of money and demand for stocks. Just like the oil speculation of 2006-2007, in which 10 times more oil was traded each day then is sold in a year, the stock markets behave according to supply and demand too. So Simon would argue that there is still a lot of money looking for investment. More demand for stocks than supply at the price.

Well that could be. And maybe, just maybe the market will go up speculatively. But all bubbles pop and eventually the bill for this has to get paid. I am happy we didn't have a total financial system reboot. But I think we are far from out of the woods. And most of my friends are beginning to run for the hills.

I am hedging my bets. Gold, foreign stocks and even shorting the Dow (although to a certain extent that's a bet against inflation). I am just not buying all this borrowing.